The Complete Guide to Life Insurance

Forbes’s LearnVest did a nationwide study on life insurance in America that showed 57% of respondents owned life insurance but only 28% were “extremely confident” about their understanding of life insurance. 66% of study respondents had a poor understanding of how accessing payouts on their life insurance worked.

Though it can certainly be confusing at times, life insurance is something you need to understand – and you can.

This guide is designed to show you the ins and outs of life insurance and give you the tools you need to make the best decisions for yourself and your family. Read on and give yourself the power to protect your loved ones.

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I. The Nuts and Bolts of Life Insurance for Americans, Part I

Life insurance doesn’t have to be a mystery. Learn the basics first so you can go on to shop wisely, as discussed in parts IV, V and VI of this guide.

American Life Insurance Coverage

In recent years, local and state governments have sent the message that life insurance is a crucial safety net for Americans with families–employers in many states must now offer workers the option of joining a group coverage plan. But while U.S. group coverage is growing, individual life coverage rates are hitting their lowest levels in fifty years. So why are so many adults–even those with young children and heavy financial responsibilities–choosing to forego coverage? It isn’t that life insurance is passe or has been replaced by a better known safety net. The real problem is that life insurance policies just seem to be getting more expensive and harder to understand. Click image to enlarge.

A. Who Needs Insurance?

Most Americans have some need for life insurance.

There are some exceptions to this rule. Some people may not need life insurance – here are a few possibilities:

  • People who have already raised their children and now live on their own
  • People who are young and single; typically responsible for only themselves
  • People who have the financial resources to support surviving family members after they’re gone

However, if you’re not independently wealthy and you have people who depend on you and your income, you probably need life insurance.

B. How the Different Types of Life Insurance Work

All life policies are either term or pure coverage, or, said another way, whole life or permanent insurance coverage. Term coverage simply provides death benefits; it’s just pure insurance, plain and simple. Whole life products have an added investment component along with their pure insurance or death benefit function; these policies build cash value over time.

Term or Pure Life Policies

In general term life requires lower payments and is less complicated. Payments for a term policy guarantee a specific benefit sum in the event of your death while the policy is still active. Essentially, term coverage works like a “parachute” to cover your family during the years in which an unexpected tragedy could be the most financially disruptive, say, before your children are grown or your mortgage is paid off.

  • Bob has a term life policy that he bought when he was 35 years old. It is a 20 year policy, so it will expire when he is 55. His family will only get money from the policy if he dies before age 55. He is 40 years old now.

In a term life policy, your payments work like a contract between you and the insurer. They keep up their end of the bargain by either paying out when you die or, if you survive the term of the policy, by providing the assurance that they will. In other words, the contract can expire without the company paying out anything. Therefore, term insurance is only worth anything if you die.

There are many choices for insurance shoppers in terms of policy length. Some term policies guarantee their rates only for the first year of the policy, while some rates last for decades. Term policies may often require year-by-year renewal, but renewing is fairly easy. And as long as the term is not up, you will not be asked to submit updated medical exams.

Insurance is regulated state by state, and each state has its own insurance commission to determine how much insurers can raise rates on renewed term policies.

  • Bob’s policy has a fixed annual premium. This means he pays the set yearly rate they gave him five years ago when he was 35, and he’ll be paying that same rate until the policy ends when he is 55.

Insurance carriers typically give you a questionnaire to decide what rate to quote you. Keep in mind that your final rate will also depend on your current health level. Insurers will require that you submit a full medical exam and they reserve the right to adjust your final rate accordingly.

term insurance is only worth anything if you die

Once the policy is in place, changes in your health will not affect your rates for the duration of your policy term. However, health changes will impact renewal rates and can even prevent you from being able to renew in some cases. For instance:

  • Bob chooses a 20 year term policy because he knows that by the time he is 55 his children will be grown up. The insurer initially quotes him a rate of $300 each year for a death benefit of $500,000.
  • After Bob submits his medical report, the insurance company adjusts his rate to $350 per year. The medical report indicates he is healthy, but his family medical history suggests that he has a higher-than-average risk for certain diseases.
  • If he stays healthy and waits to get life insurance until he is 50, he will probably pay around $1,000 each year for a policy with the same $500,000 benefit. The policy is more expensive because the risks to the insurer are higher: The chances of Bob dying before the age of 70 are much higher than the chances of him dying before 50.
  • And if Bob is still in good health and wants to get a policy at the age of 60, he can expect to pay a much higher rate of around $3,000 a year.

Convertible Term Life Insurance

Convertible term insurance is a sort of hybrid term policy. Convertibility just means that the policy can be exchanged for permanent life insurance of equal value if the policyholder decides he wants a change. Typically, this exchange requires neither underwriting nor a medical exam; that’s why it tends to costs a little more and why it isn’t available once you reach a certain age. Usually policyholders are permitted to convert term policies only until they turn 65; and the period during which conversion is possible is shorter than the period of coverage.

  • Jim is 50. He has a 20 year convertible term life policy for $50,000 of death benefits that he bought when he was 48.
  • This convertible policy provides Jim the option to pay a higher premium and convert this policy into a $50,000 cash value or a whole policy without seeing a doctor or providing a medical history.
  • Even though his policy is active until he is 68, once Jim turns 65 he no longer has this conversion option.

Whole or Permanent Life Insurance

Whole or permanent life insurance policies provide the death benefits of a term policy but do not expire; instead they are active until the policyholder’s death.

This means that unless you cash in your permanent policy, you will be paying the annual premium for the rest of your life. But unlike term policies which simply guarantee a specific death benefit value, whole life policies have an investment component and retain their cash value.

Basic whole life policies provide a fixed death benefit and a cash value that builds over time. The premium for this kind of policy is higher than for term life policies. Part of the reason for this is that a portion of your payment supports investments your insurance company makes. Payments on whole life policies usually do not change over time.

  • Robin is 42. She has a whole life policy for $500,000 that she bought when she was 35.
  • Even though her policy provides the same coverage as Bob’s, her payments are $3,000 and she will pay them annually until her death.

Like a term policy, this is a contract between you and your insurer. You hold up your end of the bargain with lifelong annual payments and the insurer guarantees to pay your beneficiaries a specific sum in the event of your death, no matter what.

These policies are also unique in that they allow you to borrow, tax-free, against the policy’s cash value during your lifetime. Of course, the policy’s cash value changes over time and is lower than the total sum of the death benefit it provides.

Another thing you are paying a higher premium for when you buy a traditional whole life insurance policy is consistency. The death benefit and payment plan of any standard whole life insurance policy are set as part of the policy and do not change. Some whole life policies will even freeze the interest rate that applies to the cash value of the policy.

The value of [a whole life policy] is guaranteed, but the payments cannot be renegotiated for any reason

Of course, all this consistency also means that the terms of whole life policies are more rigid and restrictive than other types of policies. The value of the policy is guaranteed, but the payments cannot be renegotiated for any reason. If your circumstances change and you are no longer able to pay your premiums, your only options are to depreciate the policy by borrowing against the cash value or to give up the policy altogether.

II. The Nuts and Bolts of Life Insurance for Americans, Part II

You already know the differences between whole life and term life from part one of this guide. But there are variations of whole life that you should know about, too. Finally, a careful comparison of term and whole life will prepare you to get started on your insurance shopping (you’ll find a guide to hunting down a best-fit policy in Part IV of this guide).

A. Variations of Whole Life Insurance

There are two variations of whole life insurance: universal life insurance and variable life insurance. Universal and variable life insurance are whole policies with returns which are not guaranteed; the cash value isn’t set in stone. The investment funds for these kinds of policies are connected to mutual-fund investments.

Universal Life Insurance

Universal life insurance is like whole life insurance with more flexibility. And of course, you trade in some of the certainty of the traditional whole life coverage in exchange for this flexibility. Here are some features of universal life insurance:

  • Universal life insurance adds money market investment of funds to the traditional death benefit. This means that the rate of return is set by the market and this rate isn’t guaranteed.
  • For universal life policies, annual premiums and the death benefit payout can vary. The value and cost of these policies depend on several factors: how the buyer chooses to pay premiums, how the market pays out and how the insurer calculates the death benefit. As a more flexible kind of insurance that can match a changing budget this is often an appealing choice for younger buyers.
  • You as the buyer pay premiums at a rate you choose and therefore influence your death benefit. This is where the flexibility of this kind of policy comes in but this also means that you need to keep track of your policy. Even though you don’t have to pay on a set schedule, you do need to pay an annual minimum if you don’t want to lose the policy or get a reduced death benefit.
  • Universal life insurance often allows you to increase your death benefit by making more or bigger payments and proving that your health is good.
  • You can also pay extra in order to simply accumulate cash value. This might be an attractive option because your universal policy will probably have a guaranteed minimum interest level which is a risk for you. This means your payments will be lower than for a traditional whole life policy and if the investment ends up doing better than the minimum you’re ahead, there might be enough in your policy to cover the premiums.
  • Finally, with universal life coverage your death benefits can be calculated in two ways, and you get to choose which you prefer. You can choose a set death benefit that stays the same even as your case value grows. If you do that you can reduce your premiums. Or, you can keep your payment levels steady and increase your death benefit over time.

The key to the successful use of universal life coverage is paying attention to your policy and adjusting as needed. If you’re willing to do this work then it might be the right kind of coverage for you. If you feel more secure with a set monthly payment and death benefit that doesn’t change, stick to traditional whole life.

Variable Life Insurance

If staying on top of a universal life insurance policy sounds complex and tiresome, than variable life policies are not for you. Of all forms of life insurance, variable life demands the most vigilance from policyholders.

With variable life coverage you have to choose your own investment strategy in order to maximize your death benefit; it’s like a universal policy but you (and not the insurer) are managing the investment portfolio.

Of all forms of life insurance, variable life demands the most vigilance from policyholders

This kind of policy usually comes with a minimum benefit for those who are very poor investors, but to make this kind of policy worthwhile some elbow grease is necessary. These policies also have to be registered with the United States Securities and Exchange Commission.

B. Comparing and Contrasting Term and Permanent Life Policies

There are some key differences between term and whole life policies to keep in mind.

  • Term life demands less commitment than whole life. As long as your health remains good and you don’t get too old you can cancel a term life policy whenever you want, including to snap up a better deal that you find by shopping around.
    • It’s sort of like refinancing your house. If interest rates get better you can get a better deal – as long as your property is still worth something and there hasn’t been a major change in your circumstances.
  • Term life policies are just plain insurance. It’s only when you get into whole life policies that investment decisions, cash values and related issues come up.
  • Term life only has value if you die. Whole life policies retain a real cash value. This security is a big reason people choose to pay the higher premiums.
  • Term life is for a set time period. With term it doesn’t matter when you die. Whole life has no set time period and it lasts until you die.
  • Term life is almost always less expensive.

Term life is almost always less expensive

Life insurance policy semantics can get confusing. Ultimately, these insurance options are just different, but equal approaches to providing tax-free financial security to cover your responsibilities after you’ve passed. Consider any life insurance policy as a nest egg for unfinished business. In case we haven’t sold you yet, there are a lot of reasons you need to understand life insurance. Find out what they are next in part three of this guide.

III. 6 Things to Know Before Buying Life Insurance

There are plenty of reasons why you need to understand the basics of life insurance no matter who you are.

    1. Things Can Change at Any Time – Even if you don’t need life insurance now, it pays to understand how it works. How many times have you found yourself saying, “If you’d asked me if I’d be (married/divorced/having children/losing my job/buying house) a year ago, I’d have said you were crazy, but now…” It’s really true that understanding how your insurance needs will change as your life circumstances do is a smart move.
    2. Life Insurance is a Contract – Any kind of insurance, including life insurance, is a contract. There are requirements that both you and the insurer have to make good on. It’s easy to think of life insurance as a thing you buy that just stands alone on a shelf (or in a file), but this isn’t really correct.
      • Ultimately, you’d never sign an important contract without reading it; don’t buy insurance without understanding it.
    3. Life Insurance is a Commodity that Gets Sold – This means that there are professional salespeople involved in the process who make their living off of your choices. Whenever this is true, buyer beware!
      • This is not to say that insurance agents are dishonest. However, you do need to inform yourself as a consumer or you will not be able to effectively judge your needs and what is presented to you as part of a sales pitch. Most life policies in America are sold by agents who have a major interest in selling one kind of insurance (whole life) more than others.
    4. Insurance versus Investment - Whole life insurance is a vehicle for investment, and as such it is many times more costly than term life insurance.
      • Typically this means that many Americans who purchase whole life coverage can’t afford enough to cover what they really need, and they end up underinsured.
      • Like any investment, too, returns that insurance agents quote you are educated guesses. They are often optimistic guesses; after all, as you already know, commissions depend on the sale of whole life insurance and sales pitches slant things in optimistic ways.
      • The bottom line is that today there are so many ways to invest your money and grow it that whole life policies are almost never an ideal investment vehicle. You need to understand the terrain to ensure that you make the best decisions with your money.
    5. Dealing With Loss is Difficult – No one wants to think about what will happen when they or a loved one dies. It’s depressing and can feel paranoid. While it would be easier to just plug your age and income into a machine and get an answer about what insurance to buy, there is no magic bullet.Only informed study of your situation and options can find you the best answer.
      • This means you have to understand how life insurance works and how your own circumstances will function within life insurance parameters.

You buy life insurance to take care of the people you love, and part of that process is making sure you know what you’re doing

  1. Life Insurance Myths Are Everywhere – There are many urban legends about ways to choose how much or what kind of life insurance to buy, and even why not to buy life insurance. They are almost all wrong!
    • Often people use the old formula of four times their yearly income to determine how much life insurance they need, and this is a poor substitute for actual analysis of your situations and options. What’s more, four times your income is almost never enough coverage. A straight multiple of your income does not correlate to anything. Instead, you need to assess all of the numbers and research what is available to you.
    • Have you ever heard someone say, “I can’t buy life insurance or I’m betting I’ll die!” This just doesn’t make sense. All you are doing when you buy life insurance is building a safety net for the worst case scenario. IN fact, you’re technically betting that you’ll live, and so is the insurer!

The bottom line is that with something this important, you can’t leave the decisions to chance or a salesperson. You buy life insurance to take care of the people you love, and part of that process is making sure you know what you’re doing. So, how can you make sure you know how to buy life insurance the first time? Check out Part IV and V of this guide for a primer on first time life insurance shopping.

IV. Choosing Life Insurance the First Time, Part I

According to Senate Resolution 270 from the 112th Congress in 2011 ninety-five million Americans do not have life insurance. But while the total number of U.S. life insurance policies – bought by both private citizens and employers – is shrinking, standard life plans are still among the most popular form of coverage purchased. This means there are many people in your shoes, exploring life insurance for the first time.

Worksite Life Insurance Sales

This graphic compares the sales of different types of employer-sponsored insurance plans and indicates that Life and Disability plans are more often provided by employers (and more often taken advantage of by workers) than other types of plans. Click to enlarge image.

If you’ve never bought life insurance before, you will need to seriously consider what you need out of a policy, what you’re prepared to spend on it and who you’d like it to benefit. Start your research by asking yourself these basic questions:

A. Why Do You Need Life Insurance?

The first step to purchasing the right kind of life insurance for you and your family is to carefully assess why you need the coverage. We discussed in Part I of this guide the reasons that most people can’t get by without life insurance, but what are your specific needs? Understanding your needs and reasons for buying will help you make sure you get the right policies.

Are you hoping to simply cover the costs associated with your death like funeral costs? Do you intend your insurance money to serve in place of your income? Are you hoping to pay for the cost of college for a child, maintain the mortgage of the family home or cover the retirement for a spouse? Are you hoping to leave money to a charity? Is insurance going to function as a part of your estate planning? What are your primary reasons for buying?

While you decide keep a few things in mind:

  • The most common intention people have when buying life insurance is to replace their income and maintain their family’s lifestyle.This means you have to consider not only your income but also whether your spouse will be working, if they’ll have childcare or school expenses for your children if they work, and if they will have any other resources.
  • Owning a whole-life policy doesn’t guarantee that you are fully insured; in fact it is a common problem to see underinsured owners of whole life policies who can’t afford any rise in premiums.
  • Because whole life policies do feature an investment component they are more expensive, but this doesn’t mean you should buy less coverage. Insufficient coverage defeats the purpose of your purchase: maintaining your family’s lifestyle as much as possible.
  • Only you can answer the most important question about your insurance policy:What needs must your life insurance cover to give you and your family the security that insurance is designed to provide?

Answering this and other questions carefully is the first major step towards getting the right coverage. And don’t be afraid to talk to your spouse or other loved ones about these needs. You need to know how they feel too in order to make sure you’re covering all of your bases.

Owning a whole-life policy doesn’t guarantee that you are fully insured

B. What Kind of Insurance Do You Need?

As you remember from Part I, term life insurance is characterized by lower premiums and simple death benefits without an investment component or cash value. It lasts for some set period of time and is then subject to renewal conditions. Whole life or permanent life insurance costs more and accrues cash value over time. It also stays in place until death without a fixed term.

Term life is well-suited for buyers who need the maximum death benefit for the lowest possible cost for some specific range of time. A good example of this is parents like Bob from Part I who have younger children. In case of their death, they want to make sure that their children are covered up through their kids’ college years or until the family home is paid off. Since things like college costs and mortgage payments usually end at some set point, a term policy is very useful for this kind of planning.

Whole life insurance is characterized by higher premium amounts and a savings/investment component. As long as the premiums are paid and the insured person is alive, the policy stays in place and the death benefit remains constant. Over time the cash value or investment portion of the policy grows, ostensibly to help you save for retirement.

Whole life policies also carry a lot of hidden costs; so, many buyers will find that they prefer more transparent retirement and investment strategies. For instance, whole life policies typically include high fees which can really cut into your return. Add to that the commission for the people involved, and you may just eat up all of your first year of payments. Your return for the investment portion of the policy is uncertain, and it’s not always easy to parse out how much you’re paying for insurance versus investment.

Most experts advise you to keep insurance and investments separate. There are many investment options available today, and most of them are more favorable to the investor than whole life insurance in terms of the investment value. For this reason, financial advisors do not typically recommend whole life insurance.

Here’s an example:

Alan is comparing term and whole life policies. His term policy would cost $350 each year and his whole life policy would cost $3,000 each year.

  • On one hand - If he buys term insurance he can invest that $2,500 he would be paying for whole life in some other way. Since his whole life policy only pays about 5% interest, he can probably build more value investing elsewhere.
  • On the other – Investing this money in high-performance, high-risk financial products is also more dangerous than investing outright in a whole life plan – he could lose the entire sum.

Another problem with whole life coverage is underinsurance. Because whole life is so much more expensive it is common for consumers to buy whole life policies that are affordable, but that do not actually carry a death benefit sufficient for their needs.

C. Who Whole Life Is Good For

Someone who has a high income but no head for investments or knack for saving. In this case the whole life policy functions not only as insurance but also as a forced or de facto savings account as the cash value grows year by year.

And assuming this person’s income is high enough, they will be able to afford sufficient insurance to meet their coverage needs despite the higher cost.

People with health problems or who have a high likelihood of failing health in the foreseeable future. If this is the case the person might find it difficult or impossible to get new term policies moving forward. Instead, if they maintain their whole life policy and make their payments they will always have insurance no matter how poor their health.

V. Choosing Life Insurance the First Time, Part II

A. Who Are My Beneficiaries?

Who will your beneficiary be? If you’re married, your spouse is usually the “go to” choice of beneficiaries. However, your children, other relatives or even charities of your choice can be named as your beneficiaries. It is important to review these choices periodically and update them if and when your preferences change.

No matter who you choose, you must always tell the individual or party that they are your beneficiary. It’s not a fun conversation, but they need to know where to find your important papers and how to file a claim in case they ever need to.

B. Who Should I Buy Insurance From?

Insurance companies were not created equal – so policy shoppers have to be careful. Your insurance is supposed to protect your family in case the worst happens, but it’s only going to do that if the company who sells it is strong and reliable. Each state regulates insurance and most states have some kind of online source for information about companies; here’s an example of one.

Insurance companies were not created equal – so policy shoppers have to be careful

Is the insurance company you are researching in good financial shape? This matters more than their advertisements or word of mouth. There are four major services that rate insurance companies and their financial health:

These companies assess insurance providers based on their overall ability to payout as promised – obviously this is something you need to know before buying. An insurance company’s score doesn’t need to be perfect to make their policy a good buy, but it should be high.

C. How Much Should It Cost?

Of course, it takes some legwork to pick the life insurance coverage that you’re most comfortable with. And since policies are negotiated individually, no one can direct you straight to the best policy or the best insurer for your needs. You might have switched companies for your auto or home insurance before to get better rates; you can do the same thing with life insurance.

There’s a lot of variability out there, but the time you invest researching plans will pay dividends later (literally).

You can compare quotes online or through an independent insurance agent. Independent agents can sell products from any insurance company; unlike “captive” agents who work for one company. As you compare policies, keep in mind the strength of the company as well as your specific needs.

How do you know if the prices you are quoted are reasonable? It helps to understand how insurance companies calculate rates. Usually providers consult risk and life expectancy tables to set preliminary rates. Next, they add in the costs of underwriting the policies. When you are young and in good health, the cost of basic term insurance that is renewable yearly should be very low. Into your middle age you may even be able to purchase up to $250,000 of death benefits for several hundred dollars a year.

keep in mind the strength of the company as well as your specific needs

It’s no surprise that payments go up as you age. Some kinds of term life – “level premium life” – offers rates that are a bit higher; in exchange they do not go up for the set term of the policy. Those terms can be as short as five years or as long as 30 years.

D. How Much Coverage Is Enough?

There is no simple answer to how much coverage is enough. You’ll need to asses the amount of coverage you need and for how many years you need it.

How Many Dollars?
It’s tempting to try to use a simple formula to determine how much coverage you need. Although you might hear that four times your annual income is a good rule of thumb, this is not enough coverage for most people. If you simply cannot make a detailed assessment of your coverage needs and you must use a simple calculation, try this trick offered by many financial planners:

  • Multiply your annual income by seven to ten years. The more debt you have or the more responsibilities you hope to cover (such as young children’s needs, for example), the more years you should use for this formula.

Another method you can use is to simply multiply your annual income by however many years you have left before retirement. If you are a first-time buyer, keep in mind that this estimate will end up on the high-end.

The most accurate way to find out what dollar amount you need is to calculate your family’s monthly expenses after your death and include ongoing expenses for things like tuition and mortgage payments.

You should also assess one time expenses like the cost of a funeral. You can then take your ongoing total and calculate how much of a lump sum you’ll need and how much it would have to earn to make those ongoing expenses along with the one time expenses.

Although you might hear that four times your annual income is a good rule of thumb, this is not enough coverage for most people

You can also zero in on a loose estimate of your coverage needs and your buying power with the help of online life insurance calculators like this one. Just remember that they are only a tool to help you run through the options and your circumstances; they cannot provide you with any concrete answers on their own.

How Many Years?
The other piece of the coverage puzzle is in determining how long you will need your insurance. While your gut might favor the idea of insurance that is in place for your entire lifetime, you may not need insurance for all your life. The biggest reason most people want life insurance is to care for their children. If this is a factor for you, you’ll need to estimate how long your children will need support.

If you have small children, you will be safest with insurance that will be there until your youngest child is 21 or 22, a good guess for when they may be done or nearly done with college. For most parents, this means opting for a 20 year term policy. Some people prefer to get a policy which spans from your age now to your retirement age; thereby providing for their kids and spouse.

Another factor to consider is the expense of finding insurance to replace your expiring term if you’ll be 60 or older when the term expires. Keep in mind that getting coverage once you are older than 70 may not be possible (although it is not a common age to need coverage).

VI. Saving Tips for Life Insurance Shoppers

There are plenty of trustworthy third party organizations that provide insights into making life insurance shopping easier and safer for consumers. When you’re comparing providers and policies, keep these tips in mind:

A. Really Understand Whole Life Insurance Before Buying It

Never forget, insurance companies are in business to make money. As customers look to save money and renew policies, the business of selling insurance becomes more competitive. The commission-driven life insurance agent is brilliant at selling life insurance. Just be careful of what you’re hearing or not hearing from provider representatives.

The lion’s share of insurance commissions come from the sale of whole life policies. As much as the entire first year of whole life premiums can go towards a commission, rewarding the insurance representative that sold it. Commissions on whole life products and term life products are both about the same percentage of the premium, but premiums for a whole life policy can be up to ten times higher than a term policy’s. The same can be said for the actual amount of the commission. It would be a mistake to think that salespeople are not motivated to push whole life coverage.

insurance companies are in business to make money…It would be a mistake to think that salespeople are not motivated to push whole life coverage

The odds are against you needing whole life insurance; so you are better off with enough term coverage than not enough whole coverage.

B. Health Issues and Nonstandard Policies

The lowest rates on life insurance, also called preferred or select rates, go to healthy people from healthy families. For the most part, it’s not surprising that certain health factors bump your rates way up. For instance, if you have a chronic disease, high blood pressure or are seriously overweight, you might expect to be quoted prohibitively high premiums.

But keep in mind insurance providers also look into your lifestyle and behaviors. You might also pay more for coverage if you’re a smoker, work in a risky job, such as in an oil refinery or as a pilot, or if you take part in high risk hobbies like race car driving or sky diving.

If you do have any nonstandard health problems or pursuits that make you a “higher risk,” it pays even more for you to compare many options and be a smart shopper. Independent agents might be able to help you because different companies see risk levels differently. In other words, there will likely be just one or two options for a sky diver, for example. Simple online browsing won’t provide you with nonstandard quotes.

Many consumers overlook one other fact while policy shopping: Insurance companies have specialties just like other companies…Find a company that assesses your condition by type

Many consumers overlook one other fact while policy shopping: Insurance companies have specialties just like other companies. Make sure you’re signing with the provider that is right for you. You wouldn’t see a podiatrist for a headache; don’t go to an insurance company who lumps everyone with all heart conditions together if you have a mild heart condition. Find a company that assesses your condition by type.

C. Do You Need an Agent?

Most insurance companies now have an online presence. This means researching the viability of your provider is really quite easy. You can also access financial information and consumer reviews on the largest providers to get an idea of how a company is viewed by industry peers and policyholders.

And of course, free quotes, calculators and articles are all over insurance company websites. Just be careful as you read online offers and quotes, often times the intention is to persuade rather than enlighten you. And before you begin to compare policies, consult a third party resource like this one to get an idea of what you should expect.

There are some websites that allow you to compare policies from multiple companies; this is sort of like going to Travelocity or Orbitz to find a low price on an airline flight. Insure.com and Accuquote are two examples of this kind of service.

Life Individual Market Share

This graph compares the percentage of new policies since 2002 that were brokered through independent versus company-affiliated insurance agents. Click image to enlarge.

Keep in mind that most policyholders do consult a professional as they investigate their policy options and coverage needs for the first time. You don’t necessarily need to seek out an agent that’s affiliated with your current insurer. A higher percentage of first year policies are purchased through an independently licensed advisor like a stock broker rather than a multiline insurance agent.

Remember that if your case is nonstandard, you might benefit from insider knowledge that independent agents have.

D. Ask and Ye Might Receive

Whatever quote you get from the companies you investigate, you can always submit an argument for your rate to be reconsidered and lowered. For example, if you are someone who smokes only occasionally and you can prove you rarely smoke and are in great health, you can try writing a letter asking for a lower rate. The same is true of anything about you that raises your rate. It never hurts to ask, especially if you can support your claims with evidence.

E. Buying the Right Coverage Based on the Company’s Range

Insurance companies usually price policies within ranges. Most companies change their prices incrementally, so that for every $250,000 the rate changes. You can ask companies what their rates are for each $1,000 of coverage you buy. This will let you know what the incremental changes are.

Why does it matter? The rates often go down the more coverage you buy. Kind of like buying toilet paper or other nonperishable goods that you know you’ll need in bulk, the per $1,000 price usually drops after the first $250,000.

you can always submit an argument for your rate to be reconsidered and lowered…It never hurts to ask

VII. Tying it All Together: The Do’s and Don’ts of Life Insurance

There are many basic rules of thumb to keep in mind as you shop for life insurance. If you pay attention to these they will keep you out of trouble:

Unless you have a very compelling reason to do otherwise, keep your investments and insurance policies strictly separate.

  • This means you should stick to term policies.
  • Insurance agents will tell you that whole life coverage is worth the extra cost because they last throughout your life and build up cash value that you can borrow against without getting taxed. That’s all true, but whole life policies are also bogged down with high commissions. What’s more, surrender charges that kick in if you cancel your policy can negate the cash value as much as 10 or 15 years after you buy your whole life policy.
  • You can also save cash without being taxed using IRAs, 401(k)s, and other forms of savings. These all have negligible commissions, high returns, penalty-free portability and major tax advantages. Therefore, the original cash value advantage of whole life policies just isn’t what it used to be.

Along the same lines, do remember that life insurance can supplement, but cannot replace your retirement plan.

  • You need to make sure that you’ll save enough so that after you retire you will be able to live. Most of the time if you have adequate savings once you retire your need for life insurance falls.
  • You may have a need for life insurance after you retire if your situation is unusual and you had children late in life or have other complicated estate-planning problems. This is an area that you might need an insurance expert for.

Insurance companies are not permitted to refer to life insurance as an investment or source of income for retirement. If anyone tries to sell you life insurance by saying that it is a good investment, you should be suspicious. Also, don’t confuse life insurance with annuities. People often buy annuities for retirement because they can provide steady income over a long period.

  • While you should invest income instead of using whole life insurance as a savings program, make sure that you are actually able to do so. If you don’t have the discipline to knowledge to invest well or save, it may be reasonable to consider whole or universal life. If you are accumulating wealth and able to insure yourself by saving and investing, do it before you put your money into premiums.

Don’t skimp on your life insurance; make sure you have enough. Many Americans are underinsured and they don’t even know it. Today the industry is far more competitive and overall insurance rates have dropped substantially since 2000. Even so, you will find that prices on a standard 15 year term policy will vary wildly.

The cheapest policy isn’t always the best – a small increase in price for a company with an A-plus rating is usually worthwhile. If you need special features like convertibility your price will go up. However, remember that saving $40 each year is probably not worth trusting your life insurance policy with a difficult or risky company.

Do make sure the length of your needs match the term of any policy you consider. This may seem like a no-brainer, but make sure you’ve done that math.

Do purchase life insurance while you’re in good health. The key is to buy as early as you can without buying before you have dependents and others that rely upon you.

  • You need to balance the savings you’ll see by buying while you’re young and healthy with waiting until you really need insurance.

Do tell the truth when you’re shopping for insurance. Don’t try changing the facts to get a lower rate. Insurance companies will always investigate before paying out any large claim; even if you manage to conceal a health problem through the evaluation process, they will likely find out.

  • If your insurer does find out that you lied, your family may be left without anything or fighting in court when they need support the most. The bottom line is, it’s not worth the risk.

Don’t forget that even a homemaker should probably be insured. It is a common mistake to assume that no income from outside the home means that there is no need for insurance. However, a homemaker who runs the household, provides all domestic services and raises the family’s children will leave a major gap in the finances of a family.

Don’t overlook options such as convertible term insurance. Features like convertibility can be very useful for certain people and these kinds of options are easy to overlook if you don’t have a firm grasp of what they do.

Do shop online. Even if you do end up needing the assistance of an independent insurance agent for something special, you can get your preliminary shopping done and narrow options online. You can get as many quotes as you like on the basics and avoid the sales pitch.

Don’t buy mortgage life insurance policies. These are designed to pay off your mortgage in case of your death. This is tricky because, in the meantime, you’re paying down the mortgage and technically lessening the value of the policy. Instead of opting for one of these policies, factor in the cost of your mortgage as you calculate your overall life insurance needs.

Do ask yourself: If today I gave you a check in the amount of the death benefit of the life insurance policy you’re considering, would you quit your job and work free for me until you die? If not, how far off is the benefit?

Life insurance doesn’t have to be a problem for you. It should be something that boosts your confidence and confirms that your family will be taken care of no matter what.

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